Low-earner risk from tax/universal credit interaction

People on the lowest earnings stand to lose two-thirds of the intended increase to their untaxed income when universal credit and the personal tax allowance start to interact, according to campaigners.

The charity Gingerbread commissioned research into the impact of universal credit on working single parents once it is introduced in October 2013.  

Key points

  • The structure of universal credit – tapering away support from lower-income households on the basis of post-tax income – will undermine the support offered through increasing the personal tax allowance, which to date has benefited all basic rate taxpayers equally.
  • Anyone in work and receiving universal credit will gain significantly less money from further increases in the personal tax allowance, compared with higher earning (basic rate) taxpayers not receiving universal credit.
  • For every £1,000 increase in the personal tax allowance, working people on universal credit will take home the equivalent of just £70, compared with £200 for other groups.

Gingerbread say it is probably unrealistic to restructure universal credit, at this stage in its development, away from its basis in post-tax income. But the government should review its approach to increasing the personal tax allowance further, in order to ensure that all lower-earning households continue to benefit in full from policy reform and investment intended to protect their incomes. At the very least, the government must increase the disregard level within universal credit to ensure all households continue to benefit equally from planned future rises to the personal tax allowance.

Source: Unintended Consequences: How the Structure of Universal Credit Undermines the Coalition Commitment to Support Low Income Workers through Raising the Personal Tax Allowance Threshold, Gingerbread
Links: Briefing | Gingerbread press release | Independent report

Category: